U.S. charges SAC Capital with insider trading crimes

July 25, 2013|Reuters

(MIKE SEGAR, REUTERS)

By Emily Flitter, Svea Herbst-Bayliss and Jonathan Stempel

NEW YORK (Reuters) - U.S. prosecutors indicted billionaire Steven A. Cohen's hedge fund for insider trading, a rare move that could end the career of one of Wall Street's most successful investors and trigger a fundamental change in how traders try to gain an edge over rivals.

The government accused SAC Capital Advisors LP of presiding over a culture where employees flouted the law and were encouraged to tap their personal networks of contacts for inside information about publicly traded companies.

The result was "insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry," the indictment said.

The indictment filed by the U.S. Department of Justice against SAC, together with a related civil case seeking forfeitures and money laundering penalties, imperils the future of the roughly $15 billion hedge fund.

It also may end Cohen's career of managing outside money, where he generated some of the hedge fund industry's best returns and became one of the foremost traders of his generation.

Last week, the U.S. Securities and Exchange Commission charged Cohen in a civil case with failing to supervise two employees, Mathew Martoma and Michael Steinberg. Both men have pleaded not guilty to criminal insider trading charges and face trials in November.

Many Wall Street firms that lend money to and trade with Stamford, Connecticut-based SAC may stop or pull back because of Thursday's criminal charges, though some said on they would take a wait-and-see approach.

Cohen may yet be able to stay in business because more than $8 billion of the fund's assets belong to him and his employees.

SAC said in a statement it has no plans to shut down.

"SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously," it said. "The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years. SAC will continue to operate as we work through these matters."

VIRTUAL SLAM DUNK?

The government's indictment of SAC Capital also will stand as the signature action of its multi-year crackdown on insider trading in the $2.25 trillion hedge fund industry.

The investigation burst into the open in October 2009 with the arrest of Rajaratnam, founder of Galleon Group, and led to the conviction of more than 60 people including Rajaratnam. But for authorities Cohen always was the big fish to be caught because he loomed large over the hedge fund industry.

In fact, when Cohen first opened shop, hedge funds were not well understood and the industry was a fraction of its current size, with funds managing well under $1 trillion. But in large part because of the success of firms like SAC Capital, hedge fund managers surpassed investment bankers and even some bank chief executive officers in terms of fame and fortune.

Over the years, Cohen has been the subject of two Vanity Fair magazine stories, countless front-page stories in The New York Times, and is maybe just as famous in the art world for his prized collection of works by Damien Hirst, Jeff Koons and Pablo Picasso.

More recently, he tried to become the owner of the Los Angeles Dodgers baseball team, but instead settled for a minority stake in the New York Mets. As the scrutiny of Cohen and his firm has risen in recent year, he's became more visible at hedge fund events, donating money to charities and buying even more artwork.

Several lawyers, including former federal prosecutors, said a decision not to criminally charge Cohen might signal an admission that there is a shortage of evidence against him.

But the indictment does not preclude the government from gathering more evidence and filing new charges later. Some lawyers believe the case against SAC is strong now.

"It's going to be a virtual slam dunk for the prosecution," said Solomon Wisenberg, a partner at Barnes & Thornburg in Washington, D.C., and author of "White Collar Crime: Securities Fraud."

"The story is basically that there's a whole culture here where red flags were ignored, (and) compliance efforts were more or less window dressing."

The Justice Department's decision to indict SAC, and not just individuals, is an unusual move that underscores prosecutors' belief about the pervasiveness of the alleged insider trading.

Prosecutors have shied away from indicting large financial firms after their 2002 case against Enron Corp's auditor, Arthur Andersen, helped put that firm out of business.